Tighter Fannie Mae regulations may put several new Boston-area condo developments on the firing line. Developers will be facing down a nightmare scenario. They’ll have to find ways to wring financing out of a recalcitrant market and manage to pay the bills while coping with widespread vacancies. Otherwise, a wave of defaults could rock the city skyline.
Fannie recently said that it won’t guarantee loans for condo units in buildings that are less than 70 percent sold. That’s a significant leap upward from the mortgage finance company’s old benchmark of 51 percent. Buildings that fall below that benchmark will face steep challenges selling units in an already sluggish economy, because lenders won’t be able to sell loans on the secondary market.
Significant developments that were already well below the 51 percent threshold include the Clarendon, 45 Province, the Allele, FP3, the Bryant on Columbus and NorthPoint in Cambridge. The developers of some of those buildings had been averaging one sale every month or two. They may now be faced with many more months of snail’s-pace closings, as buyers flock to brownstones, near-full new buildings and older condo developments – all of which meet Fannie’s new standards.
The new rules may be bitter pills for Battery Wharf, the Penny Savings Bank condos and the South End’s 1850 development, the three projects which were close to being able to apply for Fannie guarantees under the old 51-percent rule. They now find themselves miles away from the new 70-percent mark. Meaning that, a few weeks ago, prospective buyers in those buildings were close to (relatively) easy access to financing and low, low mortgage rates. And now, not so much.
Existing units that previously cleared the 51 percent threshold will be grandfathered in.
“If Fannie isn’t going to lend on it, the big lenders are going to say, ‘If it doesn’t meet their guidelines, we can’t sell it to the secondary market, so we don’t want it.” said Thomas Skahen, co-founder of PrimeTime Communities, a luxury condo broker based in Littleton.
The Snail Slows Down
PrimeTime Communities released a report last month that showed the sales of new condo units slowing dramatically in the city of Boston. Battery Wharf, for example, was averaging one sale per month. The report noted, optimistically, that the city’s remaining inventory of new units was more than manageable – at a sales rate of just four units per month per project, the supply would be exhausted in a year.
“Simply put,” the report argued, “we don’t have an over supply of new construction inventory in Boston. In fact, we’re going to be faced with undersupply due to developers not being able to raise debt or equity for projects, and the supply pipeline stalling.”
But for those predictions to be borne out, buyers need access to piles of mortgage financing. Under Fannie’s new rules, the developments with the largest supply of new units will have the hardest time accessing would-be buyers.
“It’s incredibly challenging for us, and extremely frustrating for the buyers,” said Janice Dumont, PrimeTime’s co-founder. “People are ready to move in, and they can’t. You get your $8,000 [federal housing stimulus tax] credit, and then you can’t get the financing.”
The more the new mortgage rules slow sales traffic in new buildings, the longer developers will wind up trying to service construction loans with very little cash flow.
“A lot of people are questioning the feasibility of places in various stages of construction,” Dumont said. “They’re in the ground, and they need occupancy. I can’t imagine, with the carrying costs, that, financially, some will be able to sustain this for very long.”
It’s not hard to envision a scenario where, with potential buyers unable to secure mortgages, the first people in line to take a hit from a default – the lead construction lender – wind up having to write dozens of mortgages for buyers in buildings, just to ensure that developers have the cash to pay back their loans. Those lenders will, of course, have to hold these mortgages on their books until the developments hit Fannie’s thresholds. Some of those conversations have already commenced.
The Clarendon, a 33-story, 104-unit joint venture between the Related Cos. and the Beal Cos., has just 17 condo units under agreement, according to MLS. The remaining 87 units carry an average listing price of $1.77 million. Still, when the Clarendon debuts later this year, it will do so as a condo-rental mix.
Other buildings under construction and well under the 70-percent sold mark include Wasserman Real Estate Capital’s Bryant on Columbus, and the Abbey Group’s 45 Province tower, according to PrimeTime’s report.
Developments that are already open but falling far short of the 70-percent mark include the Allele in South Boston, NorthPoint in Cambridge, FP3 in Fort Point, and the Penny Savings condos in the South End. If Fannie’s new regulations scare buyers away from these buildings, fuller developments stand to benefit.
“Buildings that are already past the mark, that are more mature, are going to do quite well,” Skahen predicted. “If a buyer walks into a building with 100 units, and 10 of them are sold, and the next building, 50 are sold, which one are you going to buy?”
Kevin Ahearn, president of Otis & Ahearn, luxury condo developer, said Fannie had unfairly “lumped Boston in with the inventory levels in Chicago and New York. We are not in any way, shape, or form in that scenario. We have four months of supply and no pipeline.”
“The updated condo requirements take into account the significant oversupply of condominium units nationwide, as well as the large number of condo developments that are only partially complete or occupied,” said Amy Bonitatibus, a Fannie Mae spokeswoman. Fannie Mae’s presale guideline is aimed at protecting prospective condo buyers from investing in projects that have a higher risk of failure.”
